Nov. 20 (Bloomberg) -- President Barack Obama handed the U.S. Congress a road map for an overhaul of financial-services regulation in June, including greater oversight of derivatives and system-wide risks, new ways to wind down failed companies and a consumer agency to regulate credit cards and mortgages.
The House Financial Services Committee divided the proposal into seven pieces, and completed most of its work yesterday. The committee put off to next month consideration of measures dealing with firms considered too big to fail and the creation of a national insurance office. Representative Barney Frank, Democrat of Massachusetts, plans to repackage the pieces into one measure, and send that to the House floor in December.
Progress has been slower in the Senate, where Christopher Dodd, Democrat of Connecticut, is taking the lead and so far has offered a draft proposal on Nov. 10. Dodd is expected to begin work on his draft in early December, a pace that means Congress is unlikely to complete work this year.
Obama and Congress both aim to prevent a relapse of the regulatory failures that helped lead to a near-collapse of the economy. They disagree on many of the details, as do Frank and Dodd. Here is where the major pieces now stand:
DERIVATIVES
OBAMA -- The administration wants to regulate the $605 trillion over-the-counter market for credit-default swaps and other instruments used to manage risk, by forcing transactions out of the shadows and onto regulated trading platforms. Dealers and corporate end-users would have to post collateral and comply with margin rules, increasing costs.
Obama would require only standardized derivatives -- not those custom-made for a single client -- to be traded on a regulated system. The exemption for tailor-made contracts means 40 percent to 60 percent of derivatives would be less regulated, though they would have to follow new capital rules.
HOUSE -- Two committees have jurisdiction, Financial Services, led by Frank, and Agriculture, led by Collin Peterson of Minnesota. Both approved bills that mirror the Obama exemption for custom derivatives. Unlike Obama, both committees would exempt corporate end-users like Delta Air Lines Inc., as well as hedge funds like Citadel Investment Group LLC, from trading, clearing, collateral and margin requirements. End-users account for less than 15 percent of derivatives trades.
SENATE -- In his draft proposal, Dodd would require more trades to take place on regulated platforms than either the Obama or House proposals. The Senate Agriculture Committee, which shares jurisdiction, is expected to offer a proposal next week.
INDUSTRY -- Wall Street firms are fighting back, claiming all the proposals would make derivatives too costly. Regulators say the firms are also worried that disclosure will demystify the business, leading to more competition, lower prices and less profit.
CONSUMER PROTECTION
OBAMA -- The president wants to create an agency to protect consumers from unfair practices by sellers of financial products like mortgages and credit cards. The new agency would take consumer-protection powers from the Fed, Federal Deposit Insurance Corp. and other regulators, a move those agencies oppose.
HOUSE -- The Financial Services Committee approved in October a proposal that would scale back Obama’s plan by exempting retailers, lawyers, auto dealers and real-estate brokers. Companies would not have to offer low-cost, “plain vanilla” products or assess a consumer’s ability to understand them -- two Obama provisions the banking industry lobbied to block.
The committee agreed not to preempt tougher state laws, so long as they do not have a “discriminatory effect” on a national bank. The committee also exempted small lenders with up to $10 billion in assets from CFPA supervision, though they would still have to follow CFPA rules, which bank regulators would enforce.
SENATE -- Dodd proposed a consumer agency modeled after the Obama proposal in his draft. One obstacle is Senator Richard Shelby of Alabama, the committee’s top Republican, who opposes a stand-alone consumer agency.
INDUSTRY -- The financial industry opposes the CFPA, saying it would raise costs and limit consumer choice. The industry also argues that letting states impose tougher rules would result in a patchwork of state laws and unnecessary compliance costs.
TOO BIG TO FAIL
OBAMA -- The White House originally would have made the Federal Reserve the regulator of large companies whose leverage and complexity threaten the financial system. While he didn’t name the companies, Obama’s list would likely include the 20 or so biggest banks and insurers and perhaps hedge funds and private equity firms.
The Obama plan also called for a council of regulators to monitor the economy for systemic risks and for the Treasury to decide if a company has grown so risky that it should be wound down. The FDIC would have the power to resolve, or take apart, a large company that is near or in default. The biggest financial firms would be assessed fees to pay for such resolutions after they occur.
HOUSE -- The Financial Services Committee would also make the Fed the regulator of the biggest firms, although in a somewhat reduced role. Other regulators would oversee systemic risks by the companies in their areas. The Fed would be part of a council of regulators, along with the FDIC, the Comptroller of the Currency and the Securities and Exchange Commission, which would have enhanced powers to identify companies that need tighter regulation and more capital. In conflict with Obama, Frank agrees with FDIC Chairman Sheila Bair that firms should pay into a resolution fund -- before any failure.
An amendment by Democratic Representative Paul Kanjorski of Pennsylvania that Frank’s panel adopted on Nov. 18 would let the council of regulators preemptively break apart large firms, even if they are healthy, if their collapse would put the economy at risk. The administration prefers that regulators require only troubled companies to shrink.
SENATE -- The Dodd draft would create a single regulator for banks. Instead of a council of regulators overseeing systemic risks, Dodd would have an Agency for Financial Stability, led by a nine-member board, monitor risks and determine which companies pose a threat to the economy and thus need tighter supervision. Like Obama and the House bill, Dodd would give the FDIC the role of resolving companies when they fail. Unlike his House counterpart, Dodd would make financial companies with more than $10 billion in assets cover the costs of winding down a failed company -- after the fact.
INDUSTRY -- The financial industry opposes the Kanjorski idea of letting regulators preemptively break up big, risky companies and also opposes pre-payments into the resolution fund because it believes that would unnecessarily tie up capital.
BANK REGULATION
OBAMA -- The administration originally proposed a merger of two agencies -- the Office of Thrift Supervision and the Office of the Comptroller of the Currency. He would have eliminated the thrift charter and left intact the Federal Reserve, which supervises bank holding companies and some state banks, as well as the FDIC, which also regulates some state banks.
HOUSE -- The Financial Services Committee and the Treasury agreed on a plan last month that would continue to merge OTS into the OCC. It would retain the thrift charter Obama proposed dropping.
SENATE -- Dodd, rejecting the Obama concept altogether, proposed a single bank regulator by merging four agencies into a Financial Institutions Regulatory Administration. The central bank would be stripped of all bank supervisory power and relegated to setting only monetary policy. Dodd wipes out OCC and OTS and strips bank regulation from the FDIC, giving those powers to the new agency. The consolidation, Dodd says, would stop banks from regulator-shopping.
INDUSTRY -- Bankers argue that a single regulator would undermine the two-tiered, federal-state banking system and would focus more on big banks to the detriment of community banks.
INVESTOR PROTECTION
OBAMA -- The president wants Wall Street brokers to be subject to a fiduciary duty, a legal standard requiring them to put clients’ financial interests above their own, as money managers already must do. He wants Congress to give the SEC the power to ban pay structures that give brokers incentives to sell products not in their clients’ interests. And he wants the SEC to be able to ban the practice in which consumers must agree to resolve disputes with brokers through arbitration, not litigation. Shareholder groups claim arbitration is biased because panels include an industry representative and the group that oversees arbitration, the Financial Industry Regulatory Authority, is Wall Street-funded.
HOUSE -- The Financial Services Committee approved legislation in line with Obama’s proposal on brokerage-firm regulation and mandatory arbitration.
SENATE -- Dodd’s proposal also largely echoes the administration’s.
INDUSTRY -- The securities industry says it supports a fiduciary standard, but has lobbied for a weaker requirement than that imposed on money managers. Wall Street is also lobbying against a ban on arbitration clauses.
EXECUTIVE PAY
OBAMA -- The administration, regulators and lawmakers are all pushing companies to adopt pay practices tying compensation to risk. The idea is to ban pay that allows executives and traders to make millions of dollars on the front end of transactions that later blow up. The legislative proposals fall short of mandating dollar limits. Obama would require companies to offer to shareholders a “say-on-pay,” a nonbinding vote on executive packages.
HOUSE -- Financial Services Committee Chairman Frank offered legislation that would require regulators to ban practices that encourage inappropriate risks by companies that could threaten the economy. The legislation, approved by the House on July 31, also requires publicly traded companies to allow say-on-pay.
SENATE -- Dodd’s draft legislation would require the say-on-pay votes. It would not require regulators to ban inappropriate risks in compensation practices.
INDUSTRY -- As public outrage over bailouts and bonuses build, the financial industry is agreeing to emphasize long-term incentive pay, for example by putting a larger portion of compensation in stock and restricting when the shares can be sold. Large Wall Street banks aren’t publicly opposing say-on- pay legislation.
CREDIT RATINGS
OBAMA -- Companies such as Moody’s Investors Service and Standard & Poor’s have drawn fire for putting investment-grade stamps on what turned out to be toxic mortgage securities. Obama wants to create an office within the SEC to supervise credit- rating companies and he wants ratings for mortgage-backed bonds and similar structured products to carry different symbols than the letters used to grade corporate and municipal debt.
HOUSE -- The Financial Services Committee broke with the administration by approving legislation last month that would make it easier for investors to sue credit-rating companies. The measure also would require ratings firms to disclose more about their compensation plans.
SENATE -- Dodd’s legislation, like the House’s, would let investors sue ratings companies for knowingly failing to scrutinize the loans that make up structured securities. Dodd would also let the SEC revoke the registration of a ratings firm for “bad ratings.”
INDUSTRY -- Credit-rating company executives have testified in Congress against the increased liability standards.
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